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Transitioning from spendthrift to miser

August 15, 2012

By: Nicole Thompson

How much is enough? What salary do you need to earn to be satisfied? Is there even a static answer? Is the amount you need today the same as you needed last year? Will it be the same next year?

Even as we benefit from salary increases, we still struggle to make ends meet. The usual scapegoat is inflation, the rise in the general price level.

With a little bit of introspection we can glean some useful insights that will allow our dollar to stretch even a little bit further.

Most people struggle to cope financially, regardless of their income levels. Even those who may be considered well-off feel burdened by a shortage of finances from time to time. In fact, it may appear that there is a positive correlation between the speed with which wealth is accumulated and the rapidity of its loss.

Just look at the high level of bankruptcy filings amongst lottery winners and highly paid celebrities.

Approximately one-third of lottery winners in the United States become bankrupt. We marvel at how quickly these folks squander their riches. Some of us cannot even fathom how we would spend that much money were it in our hands.

What usually happens is that as our income levels increase so too do our desires and our perception of what we need. There will always be more luxuries to acquire, things we describe as "needs" that will make our lives easier, more comfortable.

As our incomes increase, our tastes may expand. We see how certain purchases that were not possible before are now within our grasp.

We stop shopping around for bargains and the best prices. We can't understand why, with our higher incomes, we are not any better off.

In fact, we reminisce about the 'good ol' days' when prices were lower, not acknowledging that as our pockets grew, so our spending increased, sometimes outstripping our income increases. We accumulate debt, convincing ourselves that someone else is paying the bill.

Before you know it, you're burdened by a mountain of debt and bills, with seemingly no way out.

Our natural human reaction is to consume to satisfy our ever-growing list of wants, even if we describe them as needs. We are dazzled by the various products available to us in the market.

So what is the answer to this cycle of spending? How do we curb our spendthrift habits and reveal the miser within?

We can adopt a few habits of persons who have managed to accumulate wealth and hang onto it. These people are sometimes described as stingy, Scrooge-like. In short, they are downright selfish. These people are selfish with their money.

Here are five habits to adopt:

1) Plan your spending: All of it. Call it a budget or whatever you like. But the key is to have a plan and stick to it. Never buy anything compulsively or on a whim. This is the surest way to ensure the failure of your plan. Budget for contingencies and by contingencies I do not mean that new gadget that "you must have now!" but contingencies such as small medical emergencies. Insurance does not cover everything.

2) Plan your savings: You may have heard that you should pay yourself first. You may think this mantra is easier said than done. I won't deny it. This is not easy to do. What you need to do is to put systems in place to ensure you stick to your savings plan. Structures like salary deductions and direct debits ensure that your investments are put away without your being able to tap into that pool of funds.

3) Invest wisely: Take advantage of tax advantaged savings products. Accounts such as voluntary pension contributions to your pension plan and long-term investment products allow you to benefit from tax-free interest and require you to leave the investments without touching them, thereby allowing the investments to compound over time.

4) Shop around for the best price: Don't buy the first thing you see. Do a little research. Make a little effort. Don't pay more than you need to. And don't pay more than an item is worth. If you believe it is overpriced, don't be afraid to forego it.

5) Pay the correct price for every item you buy: Exercise your rights as a consumer. Pay only the posted price. Do not accept excuses about prices not being updated. Always ensure you get your correct change.

WORK TOWARDS GOALS

Incorporate these suggestions into your lifestyle and you will find you are able to focus on the important things to you and work towards those goals.

Adopt a miserly attitude. It won't make you more popular, but this is not your objective. Of course this means you will be depriving yourself of certain luxuries you now enjoy.

However, you will find that these things were not that important in the first place. After all, if they were important enough, they would have made it into the plan.

So I go back to my original question. How much is enough? The simple answer is 'more'. We will never have enough. The key is to manage what we have in the best way possible.

We must optimise our resources. In that way, we will be able to satisfy most, if not all of our needs and even quite a few of our wants.

Nicole Thompson is research manager at Victoria Mutual Wealth Management Limited.nicole.thompson@vmwealth.com

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